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• RCOM's mobile revenue
growth continues to lag that of
peers
• Its 1Q FY12 results missed our
and the market's expectations
• Maintain Underperform rating
What's new
We do not see any signs of a
significant turnaround in operations
at Reliance Communications
(RCOM) in the near term, and
believe this was supported by the
disappointing 1Q FY12 results.
What's the impact
The 1Q FY12 results missed our and
the consensus expectations. RCOM
recorded a net profit of Rs1.57bn,
23% lower than the Bloombergconsensus
forecast. Revenue and
EBITDA also came in 10% and 3%
lower than the consensus forecasts.
Adjusted for indefeasible-right-ofuse
(IRU) income in 4Q FY11,
revenue (excluding other income)
was down 1.6% QoQ, due primarily
to a lower contribution from the
global and enterprise segment
(which has been grouped together
into a single operating business unit
from 1Q FY12).
RCOM: quarterly financials
Variance (%)
(Rs bn) 1Q12 % change QoQ Daiwa Consensus
Revenue 48.5 (37) (7) (10)
EBITDA 15.1 (61) (2) (3)
EBITDA margin (%) 31.2
PAT 1.57 (7) (31) (23)
ARPU 102 (4) (1) n.a
Source: Company, Daiwa, Bloomberg
RCOM’s mobile revenue in India
rose by 3.1% QoQ, which exceeded
our forecast slightly. However, the
growth lagged that of peers – 6.7%
QoQ growth for Idea Cellular (IDEA
IN, Rs93.55, Underperform [4]), 5%
for Vodafone India (Not listed), and
3.4% for Bharti Airtel (BHARTI IN,
Rs389.1, Underperform [4]) –
suggesting RCOM continues to lose
revenue share. We expect RCOM to
lose revenue share over the next
three years, and forecast its share to
decline to 8.7% by FY14 from 10.6%
at the end of FY11.
RCOM is a late entrant to the GSM
space and possesses a relatively
under-utilised network. Also,
minutes of usage per user have been
on a declining trend over the past
few quarters (down by 21% YoY for
1Q). As such, we are sceptical as to
the sustainability of the recent tariff
hikes undertaken by the company.
What we recommend
We maintain our DCF-based sixmonth
target price of Rs79 and
Underperform rating. The key
reasons for our rating are: 1) the
disappointing operational
performance over the past few
quarters, and 2) the lack of progress
in its efforts to reduce debt. RCOM
has not been able to divest its tower
business so far, despite indicating
that it has received offers from a few
investors. Given the current capitalmarket
conditions and the possible
size of the deal, we believe the
progress may be slow.
Apart from these two issues, we
believe the news flow surrounding
the 2G spectrum controversy could
act as an overhang on the stock. We
see the key upside risk as tower
divestments.
How we differ
Our EPS forecasts for FY12-14 are
26-52% lower than those of the
Bloomberg consensus due to our
bearish forecasts on RCOM’s
operational outlook.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• RCOM's mobile revenue
growth continues to lag that of
peers
• Its 1Q FY12 results missed our
and the market's expectations
• Maintain Underperform rating
What's new
We do not see any signs of a
significant turnaround in operations
at Reliance Communications
(RCOM) in the near term, and
believe this was supported by the
disappointing 1Q FY12 results.
What's the impact
The 1Q FY12 results missed our and
the consensus expectations. RCOM
recorded a net profit of Rs1.57bn,
23% lower than the Bloombergconsensus
forecast. Revenue and
EBITDA also came in 10% and 3%
lower than the consensus forecasts.
Adjusted for indefeasible-right-ofuse
(IRU) income in 4Q FY11,
revenue (excluding other income)
was down 1.6% QoQ, due primarily
to a lower contribution from the
global and enterprise segment
(which has been grouped together
into a single operating business unit
from 1Q FY12).
RCOM: quarterly financials
Variance (%)
(Rs bn) 1Q12 % change QoQ Daiwa Consensus
Revenue 48.5 (37) (7) (10)
EBITDA 15.1 (61) (2) (3)
EBITDA margin (%) 31.2
PAT 1.57 (7) (31) (23)
ARPU 102 (4) (1) n.a
Source: Company, Daiwa, Bloomberg
RCOM’s mobile revenue in India
rose by 3.1% QoQ, which exceeded
our forecast slightly. However, the
growth lagged that of peers – 6.7%
QoQ growth for Idea Cellular (IDEA
IN, Rs93.55, Underperform [4]), 5%
for Vodafone India (Not listed), and
3.4% for Bharti Airtel (BHARTI IN,
Rs389.1, Underperform [4]) –
suggesting RCOM continues to lose
revenue share. We expect RCOM to
lose revenue share over the next
three years, and forecast its share to
decline to 8.7% by FY14 from 10.6%
at the end of FY11.
RCOM is a late entrant to the GSM
space and possesses a relatively
under-utilised network. Also,
minutes of usage per user have been
on a declining trend over the past
few quarters (down by 21% YoY for
1Q). As such, we are sceptical as to
the sustainability of the recent tariff
hikes undertaken by the company.
What we recommend
We maintain our DCF-based sixmonth
target price of Rs79 and
Underperform rating. The key
reasons for our rating are: 1) the
disappointing operational
performance over the past few
quarters, and 2) the lack of progress
in its efforts to reduce debt. RCOM
has not been able to divest its tower
business so far, despite indicating
that it has received offers from a few
investors. Given the current capitalmarket
conditions and the possible
size of the deal, we believe the
progress may be slow.
Apart from these two issues, we
believe the news flow surrounding
the 2G spectrum controversy could
act as an overhang on the stock. We
see the key upside risk as tower
divestments.
How we differ
Our EPS forecasts for FY12-14 are
26-52% lower than those of the
Bloomberg consensus due to our
bearish forecasts on RCOM’s
operational outlook.
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